James Pethokoukis

Politics and policy from inside Washington

An economic counter-factual

Nov 4, 2009 21:39 UTC

Scott Grannis, the Calafia Beach Pundit, outlines a different “stimulus path”:

Meanwhile, though, the unemployment rate is going to remain uncomfortably high, especially for all those politicians who argued so fervently early this year that dumping a trillion dollars of tax rebates, transfer payments, make-work projects and general government largess into the economy over a period of years would guarantee a quick economic turnaround. As the evidence accumulates, we see instead that it would have been far better to just let the economy follow its own course. Better still, we could have used the money in a much more intelligent fashion by making permanent cuts in marginal tax rates that would have quickly resulted in more work and more investment.

COMMENT

But the banks needed the money.They NEEDED it! You know: to get money flowing again.or throw down with more Monster Bonuses.6 of 1… It all trickles down, right?

Posted by bryan | Report as abusive

What the polls say about Obama, one year since being elected

Nov 4, 2009 18:21 UTC

Scott Rasmussen crunches the numbers:

As president, Obama lost the support of Republicans in February during the debate over the stimulus package. Over the summer, economic concerns and the health care debate cost the president support among unaffiliated voters. By October, a month-by-month review showed that Obama’s overall job approval had slipped to 48% among Likely Voters.

This morning, on the anniversary of his election, the president’s Approval Index rating is at -13, just one point above the lowest level yet recorded and down 41 points since the Inauguration.

1)  Economic conditions have played a role in dimming Obama’s support. For much of the past year, voters continued to blame George W. Bush for the economy, but the blame is more evenly divided now between Bush and Obama.

2) The core promise made down the stretch to voters by candidate Obama was a pledge to cut taxes for 95% of all Americans. Now, more than 40% expect a tax hike and hardly anybody expects their taxes to go down. Not surprisingly, 74% of voters now view the president as politically liberal.

3) Just 33% believe the stimulus package has helped, and most opposed other economic initiatives including the takeover of General Motors and the cash-for-clunkers program. Among the priorities established by the president, voters consistently see deficit reduction as the most important but least likely to be achieved.

4) The health care plan proposed by the president is struggling and is supported by just 42% of voters nationwide. Confidence in the War on Terror spiked during the first weeks of the Obama administration but has now fallen to the lowest level in nearly three years. On a related topic, one of the president’s earliest initiatives, his promise to close the prison camp at Guantanamo Bay, initially received mixed reviews but is now opposed by most Americans.

Sixty-five percent (65%) of voters now expect politics in Washington to become more partisan over the coming year. That’s up 25 points since Inauguration Day when a plurality believed politics might become more cooperative.

The president himself remains more popular than his policies. That gives him some good will to draw upon. However, as was shown in yesterday’s election results, the president’s ability to help other Democratic politicians may be limited.

‘Permanent Democratic majority’ begins to unravel

Nov 4, 2009 18:10 UTC

America’s “permanent Democratic majority” ran smack into the economy’s apparent “new normal” of high unemployment and big deficits. Score one for the economy — and for Republicans.

Now the Democratic spin on losing the governorships of Virginia and New Jersey is this: All politics are local. A weak candidate in one state, an unpopular governor in the other. Plus voters are cranky about the economy.

No broader conclusions should be drawn. Now let’s move forward and go pass healthcare, OK, America?

But the political reality is not nearly that sunny for Democrats’ political fate or the Obama domestic agenda. Jon Corzine lost in deep-blue New Jersey — a state Candidate Obama won by nearly 15 percentage points — despite outspending Republican opponent Chris Christie by some three to one.

And not only did Republican Bob McDonnell lead a GOP landslide sweep of major offices in swing-state Virginia, his 344,000-vote victory came against an opponent he defeated by just 360 votes in 2005 for attorney general.

And it wasn’t just the bad economy. Yes, exit polls showed great voter anxiety about high unemployment. But also notice huge Republican margins among New Jersey and Virginia independents, voters traditionally suspicious of government spending and budget deficits. These are the sorts of folks who left the GOP in 1992 to vote for Ross Perot and parted ways again in 2006 and 2008 because they felt Republicans had morphed again into big spenders.

(And the unemployment rate isn’t even that terrible in Virginia: 6.7 percent versus 9.8 nationally.)

Voter revulsion at trillion-dollar deficits and impatience about unemployment is creating a toxic environment for the Obama White House and congressional Democrats. Major legislative items like healthcare, energy and financial reform are already slipping into next year.

History suggests that incumbent parties who get big things done, get them done in the first year of a presidential term, such as the Reagan tax cuts or Clinton’s successful push for NAFTA. Midterm election years are where big policy dreams turn into nightmares, such ashealthcare reform in 1994.

It’s hard to imagine that the 84 House Democrats from districts won by either John McCain in 2008 or President Bush in 2004 are now more inclined to support either an expensive health plan or a cap-and-trade energy plan. Already Democrats are hinting at shrinking the former and putting the latter on the backburner. (One policy that might get more attention is a second stimulus package to create more jobs.)

Tuesday’s election results are a roadmap for political gridlock in Washington and a possible Democratic electoral disaster in 2010.

A respected political forecasting model by Ray Fair Yale University calculates that Democrats and Republicans should split the 2010 vote because of the economy. If that scenario unfolds, then David Wasserman of the Cook Political Report, according to an interview with The Hill, thinks “Republicans will probably be winning back the House.”

Did Candidate Obama really transform the American electorate a year ago? Perhaps. (Though, then again, having the economy collapse right before Election Day may have helped artificially inflate his vote totals just a bit.)

But dissatisfaction at the policies of President Obama looks to have quickly transformed it right back.

COMMENT

Can you say – “REAGANOMICS”?

Posted by Jim | Report as abusive

Elections in Virginia, New York and New Jersey show shift in political landscape

Nov 3, 2009 23:24 UTC

First, a few obsevations:

1. Democrats are getting hammered in swing state Virginia. It’s not just Bob McDonnell, down ticket, too.

2. Independents (very deficit-phobic) look like they are flocking to VA GOP.

3. Economy isnt that bad in VA, just 6.7 percent unemployment. So more than just anxiety about job loss.

4. Blue Dogs will look at VA and fear for their seats, especially if McCain in ’08 or Bush in ’04 won their districts.

5. #4 is is bad news for Obama agenda. Already it looks like healthcare will slip into 2010.

6. Spending, spending, spending is freaking Americans out. “Trilion” has a powerful, visceral impact.

7. All the candidates in NY, NJ and VA ran as low-tax, control spending types. But McDonnell in VA was able to successfully paint Dem Creigh Deeds as a taxer and spender.

8. NY a sign that me-too, moderate Republicanism is a non-stater in party. Hofffman will encourage more primary challengers and boost folks like Rubio in FL and DeVore in CA.

9.  Will Blue Dogs revolting and GOP emboldened, Obama agenda as currently constituted is in bad shape.

10. Blaming Bush for economy is done as a political weapon. New polls show 49% blame Bush, 45% blame Obama. Give that number another year of high unemployment. This was Jon Corzine’s strategy vs. Chris Christie. Good thing for Corzine that he had Dem machine in his corner, plus outspent Christie by 3-to-1.

Bottom Line: While there were local factors as play, this election day is looking like a rejection of  big-spending Washington that seems to be doing little to fix the economy. And certainly using the weak economy as crisis to be exploited is at an end. Sorry, Rahm Emanuel. Just another data point, of course. But a significant one.

COMMENT

You make some interesting points, but it seems like we hear the same lines after each election. like the above commenter, whatever the results it seems like the conservative and liberal media just trade scripts. this blog from georgetown does a good job of explaining why this election may not really say that much about the results of 2010. http://gnovisjournal.org/blog/crunching- numbers-media-polling-spin-zone-meets-el ection-2009

Posted by trish | Report as abusive

Larry Summers: Tax increases won’t hurt economy

Nov 2, 2009 14:51 UTC

Here is Obama economic guru Larry Summers at the Economic Club of New York: “I don’t find there to be much evidence that suggests that raising top marginal tax rates from 35 to 39 percent that will be implicit in the repeal of the Bush tax rates will do substantial damage to incentives in the economy.”

1) Remember that the 1993 Clinton tax increases — the Bush tax cut  expiration would restore some of those rates – -happened when the economy had been growing briskly since the 2Q 1991. A very different situation today.

2)  Here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

3) This tax increase would be in addition to possible healthcare and energy taxes.

COMMENT

Consider the source, period! Why should We be required to pay higher taxes to make up for the incompetence, greed and arrogance of both sides of the political aisle?

Posted by RMM | Report as abusive

Obama’s bad economic bet may ruin Democrats

Oct 29, 2009 18:19 UTC

The anemic third-quarter U.S. GDP report is another indication that President Barack Obama’s economic gamble may yet fail to pay off. And that could be terrible news for Democrats heading into the 2010 midterm elections.

While the new report showed the economy shifting into recovery mode, it looks like a pretty anemic expansion. As the economics team at IHS Global Insight see things, temporary factors such as cash for clunkers (accounting for nearly half of the past quarter’s growth) and the homebuyers tax credit artificially inflated growth during the past three months. The firm puts underlying growth in the economy at closer to 2 percent than the 3.5 percent.

See, back at the start of 2009, the new White House team wagered that it could construct a stimulus plan that would both boost the economy, helping Democrats in the 2010 midterms, and serve as a significant down-payment on its long-term policy agenda in areas like clean energy and education. That would help Obama in 2012.

It’s a lot to ask of one plan, even a $787 billion one.

Of course, the task would have been easier had the administration gone with a $1.2 trillion stimulus option suggested by White House adviser Christina Romer. But worried that the deluxe option would stall in Congress while also spooking global bond vigilantes, Team Obama went with the mid-sized approach.

The administration didn’t count on the recession being far worse than it anticipated, driving the unemployment rate toward double digits. So while the stimulus plan was effective enough to help nudge the economy away from depression in the second quarter — it’s tough to spend a trillion dollars with absolutely zero short-term impact — and into mild recovery mode during the third, it wasn’t nearly powerful enough to ignite a V-shaped recovery.

Indeed, during the first quarter of the last 10 economic recoveries, real GDP rose a far more impressive 5.8 percent on average. For instance, the first five quarters of the Reagan Boom coming out of the 1981-82 recession showed GDP growth of 8.1 percent, 9.3 percent, 8.1 percent, 8.5 percent,  and 8.0 percent.

There was another, better path Obama could have taken. In a new study, Harvard economists Alberto Alesina and Silvia Ardagna conclude that fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. The Obama stimulus was two-thirds spending and one-third tax cuts or credits. And of course tax cuts thought more permanent by Americans could have produced a large impact on working, savings and investing – and powerful economic growth.

Romer herself has conducted research showing the economic oomph that tax cuts produce. And there’s research from economist Robert Barro who found that “a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6 percent per year.”

As it is, Democrats are saddled with an economy that may not grow fast enough over the next year to substantially bring down the unemployment rate, if at all. So now there is a new wager in Washington: Just how bad will Democrat losses be next year?

COMMENT

Another Kudlow idiot-supply side has ruined this country

Posted by paul nelson | Report as abusive

America’s Potemkin Economy

Oct 29, 2009 14:34 UTC

That the US economy has stopped shrinking is certainly good news. But what kind of recovery is this? Strip out Cash for Clunkers and 3Q GDP growth came in at 1.6 percent. Also strip out slowing inventory cuts and GDP would have been just 0.6 percent. Then you have a report that the WH has overestimated the number of jobs created by the stimulus.

More from economist Robert Brusca:

1) But the fact is that inventories are still being cut, not being built up. Although less inventory cutting is a technical boost to GDP the fact of cutting tells us that the economy has not yet turned any corner very sharply.

2) Consumer spending spurted at a 3.4% pace this quarter, spurred important by cash for clunkers. But that program has come and gone and spending levels have SUNK BACK. So consumption is not yet on a strong sustainable expansion path.  … Cash for clunkers carried the quarter. It’s gone in Q4 and spending levels will recede, with GDP growth taking a hit. Will other spending pick up and compensate?

3) Business investment spending was a net negative this quarter and commercial real estate is under pressure – it will be no source of growth. Still business spending on equipment and software turned positive for the first time in six quarters.

4) Government spending rose by 2.3% the fifth highest rise in the last seven quarters. This is not a very good return on our stimulus monies spent. About three-quarters of a trillion dollars has been spent and with no discernable impact on GDP or on jobs.

COMMENT

We won’t enter a real recovery until we move from consumption mode to production mode. We produce little if anything of any real value. We make nice nick knacks but that’s about it. We can’t cure Cancer, AIDS, dementia, or anything else with a “financial product”. But we can sure watch others out perform the US in these areas with stunning clarity on a nice plasma screen tv made over seas.

We are magnificent killers. Our military is probably the best in the world. But that’s pretty much the only thing we’re any good at. Or at least, that’s the only thing we show the world we’re good at.

Harvard study: Obama stimulus should have focused more on tax cuts

Oct 28, 2009 18:48 UTC

Now they tell us. A new NBER paper from Harvard’s Alberto F. Alesina and Silvia Ardagna (“Large Changes in Fiscal Policy: Taxes Versus Spending”) makes the case for tax cuts over spending as stimulus:

As we well know a very large portion of the current astronomical 12 percent of GDP deficit is the result of bailout of various types of the financial sector.  … But part of the deficit is the result of the stimulus package that was passed to lift the economy out of the recession. About two third of this fiscal package is constituted by increases in spending, including public investment, transfers and government consumption. According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.

Needless to say when considering a single episode many other factors jump to mind, factors which are difficult to capture in a multi country regressions. For instance, American families were saving too little before the crisis. An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption. However, more saving might have reinforced the financial sector, think of the credit card crisis for instance. In addition, one could have though of tax cuts that stimulate investment. Also, given the gravity of the crisis an increase in the generosity of unemployed benefits seems quite warranted both in terms of social justice and in terms of sustaining aggregate demand, since the unemployed probably save very little anyway. The benefit of infrastructure projects which have “long and variable lags” is much more questionable.

COMMENT

Drewbie,I have to admit that I’m by no means an economic expert. I do however see the flow of money from citizens that actually make up the economic engine, to merchants who’s sole purpose is profit extraction.If there were real value in what is being “produced” today then there would be no need to drive debt the way we have. We were encouraged by corporate america and also by government (because of business sector lobbying), to spend money we didn’t have, to buy things we didn’t need. We were given the blessing by the powers that be to support our country’s economic growth by way of consumption.But when this experiment failed, as it was bound to, those who are supposed to represent OUR (the citizen’s) interests, instead jumped to the aid of the business/banking sector (remember the too big to fail bs?), by giving them money to stay in business.It was money that should have gone to help citizens stay afloat while the business sector was shaped by the “survival of the fittest” philosophy they touted so loudly in the 80′s and 90′s.Instead they magically convinced our elected representatives that making sure THEY stayed in business was the only way for us poor folks to be properly served. As soon as they realized that we were focusing on paying down our own debts, we stopped getting any more “stimulus” checks.By the logic displayed in the actions of our country over the past few years, it’s easy to see that our system REQUIRES that a percentage of the population go homeless, hungry,uneducated, and sick. Otherwise there is no opportunity for profit.Even though the citizenry is too IMPORTANT to fail, our “representatives” did not serve our interests. They served their own interests and the interests of those who bring money their way.Only one president ago we spent money hand over fist to kill people in other countries because we SUSPECTED they intended to do us harm. We fought so hard for this that even when we realized the truth we still went ahead and spent that money up, and spilled the blood of our children, at the expense of our own people here at home.But now we have issues of health care and education and all of a sudden cost is a factor. How absurd is this? If we were willing to spend money we didn’t have in order to kill, then surely we can make some economic adjustments in order to ensure access to health care and quality of life.This is not a technical issue (who’s going to pay, how are we going to do it etc..).It’s simply an ethical one. We’ve already made the choice to spend money we didn’t have in order to kill.Now we have a new question before us. Should we make the effort to ensure a better quality of life for our people here at home, or not?

VAT Attack! The mysterious Christina Romer and higher taxes

Oct 28, 2009 18:21 UTC

Christina Romer’s speech on Monday had this overlooked bit, which I put into bold:

Our calculations showed that slowing the growth rate of health care costs by one and a half percentage points starting in 2014 would result in a budget deficit in 2020 that was 1 percent of GDP smaller than it otherwise would have been. By 2030, the impact is a reduction in the budget deficit of 3 percent of GDP; by 2040, it is a reduction of 6 percent of GDP.23 These estimates make vivid the notion that the number-one thing we can do to help get the long-run budget deficit under control is to slow the growth rate of health care costs.

Now, slowing the growth rate of costs will not solve all of our long-run budget problems. Our population is aging and even lowering the growth rate of health care costs quite substantially leaves them growing faster than GDP. As a result, other actions will also need to be taken. While health care reform may not be the “silver bullet,” it clearly must be a significant part of the solution to our deficit woes. It is the key step that we can take right now to bring the long-run budget problem down to manageable proportions.

Me:  What “other actions” might she be referring to? Obviously higher taxes. Indeed, earlier in the speech she references the work of economists William Gale and Alan Auberach in this Brookings report:

Even if rising health care costs are an important component of the long-term problem, they are not necessarily “the” cause of the fiscal gap. The estimated gap is increased by more than 5 percentage points of GDP just by continuation of the policies that were enacted during the Bush Administration. … It will prove difficult to close the gap entirely via modifications to existing taxes and spending programs. A new revenue source, such as a value added tax (VAT), may be needed. A VAT imposed at a rate between 15 and 20 percent would essentially close the fiscal gap under the Administration’s budget.

Riding a downbound train

Oct 27, 2009 16:41 UTC

This has to be a classic piece of analysis by David Rosenberg:

Without either deep spending cuts or tax increases (a dirty three-letter word in the U.S.A. — remember Bush Sr.’s “read my lips” back in the early 90s that cost him the election?) the only way out of this fiscal mess caused perhaps by the prior Administration and now accentuated by the current Administration will be by monetizing the debt. …  In the final analysis, we all should know how this is going to play out. It is going to be somebody else that foots the bill for all this government incursion, and that is very likely the creditors who hold U.S. government paper. Not that the U.S. would ever default; that will never happen. However, there is very likely going to be a stage where this mountain of public sector debt gets monetized, and while gold is inherently difficult to value, what is going to drive the price higher, in the future, to new record highs will be the supply of bullion relative to the supply of dollars. ( …  Let’s face it, the degree of retrenchment that would be needed to bring the deficit-to-GDP ratio down to the 3-4% level that would allow the debt/GDP ratio to stabilize, would simply be too much for the U.S. electorate to put up with.

Nor does think much of the state of the stock market:

In other words, this is not the onset of a sustainable secular bull market as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:

• Dividend yields were 6%, not sub-2%.
• Price-to-earnings multiples were 8x, not 26x.
• The market traded at book value, not over two times book.
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher.
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear.
• Sentiment was universally bearish; hardly the case today.
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day.
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation

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